Banks keep mortgage rates ‘under review’, as Donohoe criticises price-cap Bill

AIB and Bank of Ireland, the State’s two main mortgage lenders, said they are continuing to keep their mortgage rates under review, after rival Permanent TSB (PTSB) suggested that it and the wider sector could resist passing on initial rate hikes from the European Central Bank (ECB) in the coming months.

Meanwhile, Minister for Finance Paschal Donohoe said a new Labour Party Bill that would give the Central Bank powers to cap variable mortgage rates would be a “recipe for creating further and bigger difficulties in future” for competition. The proposed law replicates a failed Bill that was introduced by Mr Donohoe’s Cabinet colleague Michael McGrath when he was in opposition in 2016.

PTSB chief executive Eamonn Crowley said on Friday that his bank may absorb the first two rounds of ECB interest rate hikes and not increase mortgage pricing in a bid to grow its market share. He added that Irish banks “can withstand for a portion of time some of those interest rate increases”.

Spokesmen for AIB and Bank of Ireland declined to give an indication of their mortgage pricing plans when the ECB raised rates, with each telling The Irish Times that that their groups keep fixed and variable rates under review.

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Analysts at Deutsche Bank said in a report last week that Irish banks would be among the main winners in the industry across the euro zone from rising interest rates. However, the earnings benefit will be driven by the banks no longer being charged negative rates for billions of euro of excess deposits they store with the ECB, rather than mortgage rate increases, they said.

The ECB’s deposit rate is currently at minus 0.5 per cent, while its main lending rate has been set at zero since 2016. The ECB has signalled that it will increase both by 0.25 percentage points next month, with a further increase widely expected in September.

Fixed-rate mortgages have been by far the most popular product in the Irish market in recent years and made up 44 per cent of outstanding home loans as of the end of last year, according to Davy analyst Diarmaid Sheridan. At Bank of Ireland, for example, more than 90 per cent of new home loans are being issued at fixed rates at the moment, while a majority of existing mortgage customers are also holding fixed products.

Standard variable rate mortgages accounted for 24 per cent of the market, and tracker loans, 32 per cent.

Tracker rates will move up automatically when the ECB hikes rates. The main non-bank mortgage lenders in the State have recently raised rates on new fixed-term loans in response to rising borrowing costs in the bond markets, where they raise most of their funding.

The average rate on a new Irish mortgage in April was 2.77 per cent, compared with 1.59 per cent across the euro zone, according to Central Bank data. The average new Irish fixed rate was 2.59 per cent, well below the average 3.55 per cent standard variable rate. The Deutsche Bank analysts expect the difference between Irish mortgage rates and the average rates across Europe to narrow as the domestic banks become more profitable in an environment of rising official rates.

Labour Party TD Ged Nash’s Central Bank (Variable Rate Mortgages) Bill 2022 would require the Central Bank to carry out an assessment of the state of competition in the mortgage market every quarter and move to cap rates if it decides that there has been a market failure. He told RTÉ Radio 1’s Morning Ireland on Wednesday that the imminent exits of Ulster Bank and KBC Bank Ireland are reducing competition in the market.

However, Mr Donohoe told the same programme that introducing such legislation would only make it harder to attract overseas lenders into the market.

“We’ve just seen two banks [decide to] leave Ireland, with the impact that’s going to have on choice to the consumer and competition. Pretending that we can manage the interest rate here in Ireland in a way no other European country can is only going to deepen those risks, make it harder to get competition into Ireland, harder to get financial services providers into Ireland and undermine the banks that we have,” the Minister said.